Alternate route to tax equity;

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For U.S. citizens working abroad
AN ALTERNATE ROUTE TO TAX EQUITY
by WILLIAM L. RABY/National Director of Tax Services WALTER LAMP/Partner, New York
ANDRE A. AVERSA/Director, International Standards—Tax Services
Can you make a blanket longer by cutting a piece off one end and sewing it on the other?
Discriminatory treatment of U.S. citizens working abroad hurts the American economy far more than it hurts the citizens who are the immediate target. What might be an equitable arx1 simple solution to the problems created for such citizens "by the 1976 Tax Reform Act?
First, a brief history.
Prior to 1942, a U.S. citizen who was a nonresident for more than six months of the taxable year did not have to pay any U.S. income tax on his "earned income" from outside the U.S. This was like what other countries did and still do.
From 1942 until 1963,the U.S. required a U.S. citizen to be a bona fide foreign resident in order to exclude income earned abroad when calculating his U.S. tax. In 1951, the law was eased to provide that the citizen who was out of the U.S. for 17 out of 18 months could also get an exclusion, but in 1953 a $20,000 per year limit was put on that exclusion.
The big exception to these Section 911 rules was income received from the U.S. government itself, or any of its agencies or instrumentalities. That income was fully subject to U.S. tax. But the government worker had something that partially compensated for this tax disadvantage—he received a tax-free cost-of-living allowance. Tax exemption of that allowance was conferred by Section 912 of the
U.S. Federal Internal Revenue Code.
After 1962, the rules changed. A limit was put on the amount of foreign income that a bona fide foreign resident could exclude from the U.S. tax. That limit was $20,000 per year for the first three years of bona fide foreign residence, and then $35,000 per year (the $35,000 was dropped to $25j000 in 1964). However, the $20,000 per year exclusion if the taxpayer qualified under the 17-out-of-18 months rule remained.
Before 1962, of course, the bona fide foreign resident paid no U.S. income tax on allowances and other fringe benefits. After 1962, to the extent that his income, including fringes, exceeded the dollar limits, it was subject to tax. The exclusion of the government employee's cost-of-living allowance was not disturbed, however.
Thus, prior to the 1976 Tax Reform Act, the pattern had been one of a gradually narrowing area of tax exemption for employees of the private sector. Government employ-ees abroad, on the other hand, had seen cost-of-living allowances rising with inflation, so that the area of their tax exemption, small though it was, was broadening rather than contracting.
The 1976 Tax Reform Act
The 76TRA cut the excludible amount to $15,000 (except for employees of nonprofit organizations), and changed the
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